The natural capital debt bubble

A quiet but steady revolution is taking place in the environmental movement which is having profound implications for the business community.

Environmentalism in the first half of the 20th century was characterised by two main responses to the rapid intensification of man’s impact on the natural environment. The first was targeted protection of endangered species; the second was the designation of specially protected parks and nature reserves. These remain the two pillars on which the foundations of the modern conservation movement are built, and have led to many notable successes from the return of the once critically endangered otter to every county in the United Kingdom, to the protection of now world-famous national parks like Yellowstone or the Serengeti.

Yet, these conservation successes represent minor skirmishes in a war being lost on almost all fronts. Despite targeted species conservation projects backed by legal protection in most countries and around 13% of the world’s land surface now designated as protected areas, the global species extinction rate is running at around one thousand times the background rate as calculated from the fossil record. A quarter of all plant species are considered by the United Nations Convention on Biological Diversity to be threatened with extinction and these are the same plants we rely on for our medicines, food and other raw materials.

In the latter part of the 20th century, we built on the two pillars and began to deepen our understanding of our impacts on the delicate balance of the environment as a system on which we are ultimately dependant for our health, well-being and prosperity. A new wave of environmental NGOs campaigned as much about the plight of humanity on a failing planet, as they did for the plight of nature.

The 21st century has seen a further evolution of systems thinking to the point where we now at least understand that to restore the 60% of those ecosystems already degraded worldwide, we need a radical overhaul of economic and social policy, not just environmental policy. In effect , we are now working on building a third pillar – an ecosystems pillar – which if we succeed in getting right, might just mean we can accommodate 9 billion people on earth by the year 2050.

What then does this system’s thinking mean in practice, and why is it revolutionary?

The difference now is that we are getting serious about quantifying the value of nature’s stocks (natural capital) and nature’s flows (ecosystem services) in a way we have never attempted in the past.

By valuing natural capital in a similar way to financial, manufactured, social and human capital, we can make decisions on the stewardship of the natural environment based on hard-nosed economics, and not just on the vitally important moral case for saving nature for nature’s sake.

Not all conservationists are comfortable with this quiet revolution. Opponents suggest such ‘commodification of nature’ could lead to our remaining natural resources being sold to the highest bidder. They argue that the intrinsic value of nature must take precedence and a price cannot be placed on the priceless.

It’s hard to disagree, but my view is this should not become a polarised debate, it is not an either/or question. Even among traditionalists, there is a broad acceptance that as long as the value of nature remains invisible in economic decision making, we will simply continue to generate financial profits through running up a massive natural capital overdraft.

There are parallels to be drawn with the bursting of the ‘debt bubble’. Globally, we underestimated, or ignored, the risk of bad financial debt and, aside from a few enlightened states and businesses, we are currently largely ignoring the risk of runaway natural capital debt.

Early adopters in natural capital accounting include the sports-lifestyle company Puma who, through their Environmental Profit and Loss methodology calculated an impact of €51 million resulting from land use, air pollution and waste along the value chain, which when added to a previously calculated €94 million for carbon emissions and water consumption amounts to €145 million worth of unaccounted for environmental externalities every year.

It was both brave and smart of Puma to undertake this analysis. Brave because they are one of the first and now have a huge challenge to bring that figure down to as close to zero as possible; smart because they now have invaluable data to enable informed risk planning and strategy development.

At the government level, several countries around the world are developing or considering legislation on natural capital, including Botswana, Costa Rica, Colombia, Georgia, Germany, Peru, Philippines and the United Kingdom who recently met in Berlin at a Globe International summit to share ideas on how best to implement state level natural capital accounting. In the UK the government has set up a high-level Natural Capital Committee to look at where, when and how natural assets are being used unsustainably.

For the corporate world, natural capital accounting is part of what might be called ‘second generation’ corporate social responsibility (CSR). This is a move from a project-based approach to CSR where good-news case studies are presented in the annual report, to a more systematic appraisal of the whole business and its impacts on social and environmental systems.

Second generation CSR will undoubtedly remain useful in ethical marketing of products and services, but more importantly, it will also improve decision making and business competitiveness. Why, for example, continue to source a raw material such as cotton from an agricultural ecosystem where soil is eroding and aquifers are drying up when there are sustainably managed ecosystems in other parts of the world as alternatives?

The simplistic answer might be that it is cheaper and in the short term this may be the case but in the medium to long-term, the risk of ecosystem collapse and subsequent supply insecurity and price volatility could have profound effects on the bottom line.

For governments the process of natural capital accounting will have even more profound consequences for decision making. To give an example, the TEEB for Business Coalition and Trucost have calculated that cattle ranching and farming in South America has a natural capital cost of $312.1 billion but the revenue following from this activity is a mere $16.6 billion.

Logically, the governments of South America should be investing more in the protection of undamaged ecosystems, particularly forests, rather the converting these to monocultures which realise far lower net present values for the continent and its nations.

This would mean restricting opportunities for some landowners, loggers and farmers to make often substantial private profits on the back of public natural capital – a choice many politicians might consider tough to sell to the electorate.

Yet, embracing such nature-based solutions is a course of action rapidly becoming an imperative if we are to secure a healthy, prosperous and peaceful future for humanity. It is common sense ecologically, socially and economically, but as so often with common sense, it is going to take some explaining.